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An IRA conversion is a transfer of Traditional, Traditional Rollover or SEP IRA assets to a Roth IRA with the same custodian or as a trustee-to-trustee transfer or rollover. A conversion is subject to Form 1099-R reporting for the distribution from the non-Roth and Form 5498 for the contribution to the Roth IRA.
You are eligible to convert to a Roth IRA if your modified adjusted gross income (MAGI) does not exceed $100,000 (not including the IRA conversion amount) in the year you convert. This rule applies to both single and joint tax filers. Married individuals filing separate tax returns are not eligible to convert to a Roth IRA unless they have lived apart from their spouse for the entire tax year.
If you convert in 2010, neither the MAGI limit nor the requirement that married filing separately spouses live apart for the year will apply. Generally, when you convert to a Roth IRA, you are required to pay taxes on any taxable converted amount including deductible contributions and any investment earnings. If you convert in 2010, the income taxes may be spread over 2011 and 2012, with 50% of the taxes due being paid in each of those years. Furthermore, if you convert your Traditional IRA to a Roth IRA, the taxable portion of your Traditional IRA will not be subject to a 10% penalty tax regardless of your age at the time of the conversion unless the full amount of the distribution is not converted (for example, if you elect to withhold taxes and the amount withheld is not replaced.)
The deadline to convert to a Roth IRA is December 31 of the year you choose to convert.
An IRA recharacterization is a transfer of converted Roth IRA assets back to a new or existing Traditional IRA account. Roth IRA converted amounts from a SEP IRA may also be recharacterized back to a SEP IRA account. IRS reporting is required for the distribution from the Roth IRA and the contribution to the non-Roth IRA.
Election to recharacterize must be made by the tax return due date, plus the maximum six-month extension period (whether or not the return is actually extended). The deadline to recharacterize a 2010 Roth conversion is October 15, 2010. An IRA recharacterization is a transfer back to a new or existing Traditional IRA of converted Roth assets. Roth IRA converted amounts from a SEP IRA may also be recharacterized back to a SEP. IRS reporting is required for the distribution from the Roth and the contribution to the non-Roth IRA. Timing Election to recharacterize must be made by the tax return due date, plus the maximum six-month extension period (whether or not the return is actually extended).
The deadline to recharacterize a 2010 Roth conversion is October 15, 2010.
Reconversion is defined as a second conversion (following a Recharacterization) from a non-Roth IRA to a Roth IRA. Taxpayer has already made a first conversion from a non-Roth to a Roth IRA and then recharacterized the conversion amount (including net earnings) back to a non-Roth IRA. You may not convert, recharacterize and then reconvert in the same tax year. IRS reporting is required.
A taxpayer cannot reconvert back to a Roth IRA until the later of:
January 1 of the tax year following the year of the first conversion, or
30 days after the recharacterization to a non-Roth IRA
If the taxpayer makes a reconversion within the same tax year or before the 30 day waiting period, the reconversion is disregarded and the taxpayer must use the value of the non-Roth IRA at the time of the first conversion to calculate the taxable income for the year.
Consult your tax advisor before you decide to convert to a Roth IRA.